Corporate Finance 1
Q- CHAPTER 10.
MAKING CAPITAL INVESTMENT DECISIONS
-------------------------
1/MULTIPLE CHOICE:
1. https://web.utk.edu/~jwachowi/mcquiz/mc13.html
2. https://web.utk.edu/~jwachowi/mcquiz/mc12.html
2/QUESTIONS:
10.2a What is a sunk cost? An opportunity cost?
10.2b Explain what erosion is and why it is relevant.
10.2c Explain why interest paid is not a relevant cash flow for project
evaluation.
3/CHAPTER REVIEW AND SELF-TEST PROBLEMS CHAPTER REVIEW
AND SELF-TEST PROBLEMS : Đọc và làm phần này (đã có đáp án)
4/.E1,2,3,4 –p327 (9th edition) – critical thinking
5/E1,2 –p 327 (Question and problems)
Relevant Cash Flows [LO1] Parker & Stone, Inc., is looking at setting up a new
manufacturing plant in South Park to produce garden tools. The company bought
some land six years ago for $6 million in anticipation of using it as a warehouse and
distribution site, but the company has since decided to rent these facilities from a
competitor instead. If the land were sold today, the company would net $6.4 million.
The company wants to build its new manufacturing plant on this land; the plant will
cost $14.2 million to build, and the site requires $890,000 worth of grading before
it is suitable for construction. What is the proper cash flow amount to use as the
initial investment in fixed assets when evaluating this project? Why?
2. Relevant Cash Flows [LO1] Winnebagel Corp. currently sells 30,000 motor
homes per year at $53,000 each, and 12,000 luxury motor coaches per year at $91,000
each. The company wants to introduce a new portable camper to fill out its
product line; it hopes to sell 19,000 of these campers per year at $13,000 each. An
independent consultant has determined that if Winnebagel introduces the new
campers, it should boost the sales of its existing motor homes by 4,500 units per
year, and reduce the sales of its motor coaches by 900 units per year. What is the
amount to use as the annual sales figure when evaluating this project? Why
6/E3,4,5,6,7,9,11 – p328
Corporate Finance 1
E3 Calculating Projected Net Income [LO1] A proposed new investment has
projected sales of $830,000. Variable costs are 60 percent of sales, and fixed costs
are $181,000; depreciation is $77,000. Prepare a pro forma income statement
assuming a tax rate of 35 percent. What is the projected net income?
E4
E5 OCF from Several Approaches [LO1] A proposed new project has projected
sales of $108,000, costs of $51,000, and depreciation of $6,800. The tax rate is
35 percent. Calculate operating cash flow using the four different approaches
described in the chapter and verify that the answer is the same in each case.
6. Calculating Depreciation [LO1] A piece of newly purchased industrial equipment
costs $1,080,000 and is classified as seven-year property under MACRS. Calculate the
annual depreciation allowances and end-of-the-year book values for this equipment.
7. Calculating Salvage Value [LO1] Consider an asset that costs $548,000 and is
depreciated straight-line to zero over its eight-year tax life. The asset is to be used in a
five-year project; at the end of the project, the asset can be sold for $105,000. If the
relevant tax rate is 35 percent, what is the aftertax cash flow from the sale of this asset?
9. Calculating Project OCF [LO1] Summer Tyme, Inc., is considering a new threeyear
expansion project that requires an initial fixed asset investment of $3.9 million.
The fixed asset will be depreciated straight-line to zero over its three-year tax life,
after which time it will be worthless. The project is estimated to generate
$2,650,000 in annual sales, with costs of $840,000. If the tax rate is 35 percent,
what is the OCF for this project?
11. Calculating Project Cash Flow from Assets [LO1] In the previous problem,
suppose the project requires an initial investment in net working capital of $300,000,
and the fixed asset will have a market value of $210,000 at the end of the project. What
is the project’s year 0 net cash flow? Year 1? Year 2? Year 3? What is the new NPV?
7/E13,14,19 –p330
13. Project Evaluation [LO1] Dog Up! Franks is looking at a new sausage system
with an installed cost of $560,000. This cost will be depreciated straight-line to zero
over the project’s five-year life, at the end of which the sausage system can be
scrapped for $85,000. The sausage system will save the firm $165,000 per year in
pretax operating costs, and the system requires an initial investment in net working
capital of $29,000. If the tax rate is 34 percent and the discount rate is 10 percent,
what is the NPV of this project?
14. Project Evaluation [LO1] Your firm is contemplating the purchase of a new
$720,000 computer-based order entry system. The system will be depreciated
Corporate Finance 1
straight-line to zero over its five-year life. It will be worth $75,000 at the end of that
time. You will save $260,000 before taxes per year in order processing costs, and
you will be able to reduce working capital by $110,000 (this is a one-time
reduction). If the tax rate is 35 percent, what is the IRR for this project?
19. Cost-Cutting Proposals [LO2] Geary Machine Shop is considering a four-year
project to improve its production efficiency. Buying a new machine press for
$560,000 is estimated to result in $210,000 in annual pretax cost savings. The press
falls in the MACRS five-year class, and it will have a salvage value at the end of
the project of $80,000. The press also requires an initial investment in spare parts
inventory of $20,000, along with an additional $3,000 in inventory for each
succeeding year of the project. If the shop’s tax rate is 35 percent and its discount
rate is 9 percent, should the company buy and install the machine press?
20. Comparing Mutually Exclusive Projects [LO1] Dangerfield Industrial Systems
Company (DISC) is trying to decide between two different conveyor belt systems.
System A costs $430,000, has a four-year life, and requires $110,000 in pretax annual
operating costs. System B costs $570,000, has a six-year life, and requires $98,000
in pretax annual operating costs. Both systems are to be depreciated straight-line to
zero over their lives and will have zero salvage value. Whichever project is chosen, it
will not be replaced when it wears out. If the tax rate is 34 percent and the discount
rate is 11 percent, which project should the firm choose?
8/E20 –p331
